Obtuse Observer

February 26, 2013

Sequester Will Mean the End of the Universe

Filed under: Debt,Deficit,Sequestration — Tags: , , , — Obtuse Observer @ 4:00 pm

Barack Obama  Let me be clear.  Unless Republicans are willing to increase taxes on the rich, who, let’s face it, are already allowed to keep way too much of your money, we will face consequences of disastrous proportions.  Firefighters, police officers, teachers and day care workers will be out of a job.  Millions will go hungry.  Crime will escalate to distopian proportions.  Within weeks our satellites will begin hurtling from the sky.  They will land on the few remaining schools and day care centers crushing our children.  They will land on power plants, factories and juice bars.  These impacts will create firestorms that will grow and as these storms grow and consume cities, states and entire regions they will merge  causing predetermined and automated protocols to be triggered launching our nuclear arsenal.  The international retaliation will be certain, swift and will destroy the planet.  All this because of Republican intransigence and their stubborn determination to protect the rich and greedy.

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sequestration_cuts_in_perspective 2Problem is, President Obama and his Chief of Staff Lew pushed for and got the sequestration legislation passed as noted by Bob Woodward - no friend of the right.  Problem is, those first responders, teachers etc are not federal employees.  Problem is, the President decides where to impose cuts in spending not Congress.  Problem is, the “cuts” actually amount to about $44B with the other $41B being cuts IN GROWTH of spending.  Problem is, in perspective $44B is small compared to the $224B we’ll spend on debt interest.  Problem is, $44B is small compared to the $845B deficit and downright miniscule when compared to the $3553B President Obama plans to spend in 2013.

The first step in solving a problem is admitting that we have a problem.  We have a spending problem.  We have a President in denial who is preaching doom that would be otherwise laughable if people weren’t buying the load he’s shoveling.

Sequestration chart source: Cato, Tad Dehaven, Sequestration Cuts in Perspective

 

Update 2/28/13:  Apparently the Obama Administration is upset with Mr. Woodward and a staffer yelled at him for half an hour and followed that meeting up with a threatening e-mail.  Story here.  Pure class guys…. pure class.

December 31, 2012

Fiscal Cliff?

$15.6T in $100 billsFacts:

Sequestration is set to cut $1.2T over the next decade (cut explained) while annual deficits are currently running at roughly that  amount.

Our national debt is around $16T

Unfunded mandates in Medicare, SS and federal pensions total in the neighborhood of $86T over that same decade.

The Fed is monetizing our debt through the policy of Quantitative Easing (printing, figuratively, money to buy debt, T-Bills, from the government) and purchasing toxic assets at the clip of $40B per month from Fannie and Freddie.  For video of Federal Reserve Chairman Ben Bernanke explaining the policy with accompanying article explaining the practical implications of the policy click here.

Our bond rating has been downgraded and may be again.

Knowing these things… Does anyone think either party is serious in the slightest about addressing our long term financial brick wall… the one we’re flying toward at warp speed… that we’ll hit AFTER going over the cliff?  Me neither.  Lest anyone think I’m blaming a single party, I am not.  George Bush and the Congressional  Republicans started an absurd spending spree that candidate Obama called (correctly) “irresponsible” and “unpatriotic“.  Thing is, after getting elected he and the Congressional Democrats doubled down and hit the gas.  Now we have both parties unwilling to compromise.  They’ve both played an optics game that ignores reality and paints them into corners.  The GOP offers deduction reform to Obama that would generate the same revenue that rate increases would provide; Obama declines and sends his press secretary out to say the GOP isn’t serious.  Obama offers raising his tax increase floor.  The GOP declines.  Is either side serious?  We know the most likely outcome here.  We go over the cliff, the parties will posture for a while then work out an agreement that pretty much puts us in the same place we were in prior to the sequestration ordeal and claim victory.  Spending will resume, the debt ceiling raised and income tax rates will be raised on those making some number north of $400K per year. 

Our problem:  We are spending too much money.

Our solution:  Revenue most go up and spending must go down. 

How?  It is going to suck and  ain’t no one gonna be happy.  Current leadership in Congress and the Oval Office has demonstrated no interest in addressing the problem; they are behaving cowardly. 

Tax reform is needed.  We need more tax payers.  We need to gut the tax code and eliminate perverse incentives, deductions for politically preferred industries and the marriage penalty.  We can drop rates on that wider base of tax-payers to create a larger economic tax base through growth that will increase revenue.  As a practical matter politics will make this very hard and as hard as it will be, it will only get harder the longer we wait.  Too often we do not act until the option not to act has been eliminated.  

Entitlements must be reformed.  Medicare and SS need to have the benefits collection age bumped (grandfather in those close to collection – say 55 and older) and a means test applied. 

We must reform the bureaucratic system.  It is bloated, duplicative (and often greater), inefficient and an impediment to individuals and businesses.  The power of the bureaucracy to prevent reform of the bureaucracy is something to be greatly concerned about.   One thing history teaches us is that great civilizations acquire bloated bureaucracies that demand to be appeased (see China, the Ottoman Empire, Russia, Soviet Union etc).  They are reformed only with great pain and usually by despots, see Mao, Kemal  Ataturk, Peter the Great and Putin.  We can reform ours now or we can wait for it to become so onerous of a burden that we sacrifice our Republic in order to cede sufficient power to “great reformer” to reform it.  The latter is a much less attractive option, see Mao, Kemal  Ataturk, Peter the Great and Putin. 

Our bureaucracy is suffocating the middle class and furthering their dependence on government at an accelerating rate making them smaller as the bureaucracy grows larger.  Too often reform is opposed on the basis that it will harm the little guy.  History teaches us another lesson; the rich and powerful tend to stay on top even after radical change comes to a society; they tend to be invested in preserving the mechanisms that create and keep the small in place – not help them.  Don’t be fooled by claims that the government must be grown to protect the little guy from the big guy…. especially when the big guy is pedaling the claim.

 

September 18, 2012

Why (Knowing) History Matters… updated

Filed under: China,Debt — Obtuse Observer @ 6:41 pm

From a recent Telegraph article:

A senior advisor to the Chinese government has called for an attack on the Japanese bond market to precipitate a funding crisis and bring the country to its knees, unless Tokyo reverses its decision to nationalise the disputed Senkaku/Diaoyu islands in the East China Sea.

This is exactly what President Eisenhower did to the Brits when they seized the Suez Canal in 1956.  (see earlier blog Why (knowing) History Matters) He threatened to sell all American holdings of UK bonds which would collapse the Pound Sterling and destroy the ability of the UK to borrow.  Those who own our debt own a veto.  China holds over $1.1T of our debt.  Not a good thing.

January 31, 2012

Why (knowing) History Matters

In the busy year of 1956 Gen Gamal Abdel Nasser of Egypt seized the Suez Canal.  The French and British, who relied on the canal as a link between vital economic and geopolitical interests, were not pleased.  There was much political intrigue regarding regional events following WWII that lead to the seizure.  They are too numerous for the purposes of this blog but a short regional list includes:  the Algerian War, Soviet support for the FLN and Soviet Foreign Minister Vyacheslav Molotov‘s offer to French Foreign Minister Guy Mollet to withdraw same in exchange for French withdrawal from NATO, Soviet offers to finance the Aswan Dam, American opposition to the Anglo-French redrawing of the middle-eastern map after WWI which established two Hashemite Kingdoms, how to deal with the new State of Israel, and the Hungarian revolution.

Diplomacy failed.  The British and French allied with the Israelis, attacked Egypt and seized the Suez Canal.  The well planned and executed military operation was accompanied by a poorly planned and failed political operation.  The seizure was broadly condemned. 

The simplified and condensed factor resolving the conflict:  The Anglo-Franco Israeli coalition was made to collapse by a threat from President Eisenhower to sell the American holdings of UK Pound Sterling Bonds.  The threat if carried out would quickly and catastrophically collapse the British economy.  The threat was believed, the Canal returned and forces withdrawn.

Why is this important?  The United States used their economic leverage, massive amounts of UK war debt not fully paid off until 2006, to force to reverse a British policy the Eden government believed to be in their geopolitical best interests.

Why does this matter to the US today? 

Our 2010 estimated GDP was $14,660,000,000,000.00 ($14T)

As of today our outstanding debt is $15,236,231,788,440.22.   ($15.2T)

Debt held by China is $1,132,600,000,000.00 ($1.1T) or roughly 25% of our sovereign debt as of November 2011.  With a couple subsequent debt ceiling raises of $1,200,000,000,000.00 and Europe in economic crisis the cash total and debt ratio held by China is most wisely assumed to have increased.

Holding 25% of our debt which is the equivalent of 25+% of our GDP gives China a veto on American policy.  That is not a good thing.

 See also, Why Our Debt Crisis Matters

December 7, 2011

Why Our Debt Crisis Matters

Filed under: 2011 Budget,Debt,Deficit — Tags: — Obtuse Observer @ 2:53 am

Exorbitant national debt is a more immediate, real and serious issue than any other facing us today.

Massive levels of debt moves us closer to collapsing governments across the planet. Massive instability in that sense is something to be very frightened of. Think global Somalia.

Globally the love of bashing America as a colonialist is useful for dictators needing to redirect their people’s anger at their situation and others who either deny or are unaware of the stability America brings to the world.

Our current national debt is $15,073,380,701,589.57.  The estimated GDP for 2010 was $14.66T.  “T” means trillion.  I’m not sure I really understand what that number means.  It is awfully big though.  The interest on our debt in 2011 cost us $454,000,000,000.00 (double the 1988 price tag).  Let’s put that into perspective:

198 countries have a GDP smaller than our interest payments.  That leaves 28 countries worth more than our debt service.

In 2010 France, Russia and the UK spent less on their COMBINED military budgets.

In 2011 China spent $380,000,000 on its military.

 

It could be said that our debt helps fund the militaries of our enemies around the globe.  Here’s a list of foreign holders of our debt.  China tops it off with $1.14T of the $4.6T held by foreign governments; that’s 25% of it folks. 

Our debt levels are unsustainable and must end; the only remaining issues are when how much will it hurt.  Resolving the crisis will likely further weaken our economy and negatively impact our military strength.  A weakened economy and weakened military reduces our ability to influence global politics. If potential aggressors stop fearing reprisal from America through economic or military means restraints on their behavior will weaken and possibly collapse.

A weak America creates global instability.

Why?  Does North Korea stays on their side of the DMZ because of respect for the cease-fire that it repudiated on May 27th?   Has Iran not (openly) interfered with Iraq out of courtesy?  How long would Taiwan remain an independent nation without American support?

If those restraints break down the possibility massive and global warfare will become more likely.  That is not a good thing.

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